Cross border trade in insurance = risky business

This past week in Port of Spain, workshops have been arranged by the Caribbean Association of Industry and Commerce (CAIC) to deal with the challenges of the Caribbean Single Market and Economy (CSME), Free Trade Area of the Americas (FTAA) and General Agreement on Trade in Services (GATS) so that business leaders in the region could come to terms with the new trading environment and to put them in a position to engage in discussions that would likely shape the negotiating strategies of the regional governments.

While this approach might have come somewhat late in the day in the light of the progress of the FTAA and GATS, there is an old saying that “it’s better late than never” and in that sense it is never too late for the private sector to interest itself in what is taking place and to seek to influence the final outcome. In the final analysis, it is governments that negotiate agreements but it is the private sector that is involved in the business of trade. Trinidad and Tobago has committed itself to the full operation of the CSME by 2004. There are currently many impediments to the implementation and major legislative changes will be required. While there is good reason to have the entire Caricom market be seen and treated as a single market since in today’s world individual Caribbean countries are clearly too small to be taken seriously on the world stage, there are indeed difficulties to overcome, as each country is run by sovereign governments some of which are primarily interested in seeking the interest of their own people and not necessarily the wider Caribbean.

Let us now discuss what the single market might mean for the insurance business. If we analyse the European model, their single EC market now allows an insurance company established in a member country to operate in another member’s country provided that it meets the requirements of the insurance regulators in the country of establishment. For example, a German company operating in the Italian market will continue to be regulated by the German authorities. All of this was possible because the level of insurance supervision in all the member states was comparable and the expertise available to the regulators was acceptable regardless of the jurisdiction.

Consider the situation that currently exists in the Caribbean. Trinidad and Tobago’s insurance legislation was once recognized as the model but unfortunately it has not been amended to take into account the realities of today’s world and 20 years is a very long time in a business that has undergone significant transformation. Therefore, the first step is to update the legislation addressing issues of capital, solvency and investments and ensure that the regulators have the necessary tools to monitor the governance of the insurance industry. The next step is for insurance legislation in the other member states to be upgraded and thereafter to ensure that the regulators have the capability to monitor the companies so that troubled companies are not permitted to operate in other member states because they obtained a clean bill of health from a poorly regulated jurisdiction.

The present situation of licensing in each jurisdiction and bringing capital to support risks underwritten must no longer be a requirement but that change in policy would inherently bring competition to indigenous companies in the smaller territories and they might then find it difficult to survive. A CSME along the EU model for insurance would provide greater choice of products and services for citizens in the smaller islands but at the same time give the insurance providers from the MDC’s a likely advantage over the home grown companies. Turning to the FTAA and GATS, we have reached the request and offer stage of the negotiations and already we are witnessing the push for market access by the world’s dominant players for cross border trade. Any observer who was following the negotiations closely would have predicted that the big developed countries were interested in cross border trade in preference to the establishment of operations in developing countries.

Firstly, it is costly to set up office locally and be subject to local laws, hiring practices and competing for local labour and expertise. It is obviously far cheaper to stay in one’s home market and engage in cross border trade picking and choosing only those risks that give the highest revenue with minimum transaction costs utilizing existing human and physical infrastructure. While this model is the ultimate goal of the developed countries, developing countries must be informed and be alert to the dangers that cross border trade will pose to local companies. Trinidad and Tobago’s market is open and liberalized when compared to many countries around the world. It does not restrict new entrants and the entry barriers are quite low so it is not difficult for any serious player to enter the market. In fact, new entrants are welcome, but the up front costs of establishment act as a deterrent when in their view the market is small and therefore unattractive.

It is important that private sector leaders busy themselves in obtaining information and knowledge of the state of negotiations. The government negotiators must take on board the views of the private sector that are involved in trade in services and ensure that while it is difficult or impossible to protect home markets, the competitive advantages of local companies must not be negotiated away. We must learn from the experiences of the many countries that are opening their markets but only slowly. Trinidad and Tobago cannot be accused of protection or a closed market but we should not be at the forefront of promoting or agreeing to cross border trade in insurance services when the world is a long way from unbridled market access.
E-mail: daquing@cablenett.net